HMRC overtaxing savers on pension withdrawals

Thousands of over-55s who have made a one-off withdrawal from their pension may have paid too much tax in 2016/17, according to a Freedom of Information request.

Research by the Telegraph suggests as many as 200,000 savers have overpaid, many of whom will be unaware they have paid over the odds to the taxman. 

HMRC is not proactively contacting those affected, with only 42,700 savers attempting to reclaim deductions relating to the 2016/17 tax year.

Individuals who spotted the error have reclaimed their share of £27 million from HMRC in the 3 months to 31 July 2017. 

Steve Webb, a director at insurer Royal London, said:

“It cannot be acceptable to take thousands of pounds per person in excess taxes, and then expect people to have to claim that money back.

"The rules need to be changed so that only basic-rate tax is deducted and any extra tax due is collected through the normal tax return process. This would be a far fairer system.”

Why is this happening?

Savers are being overcharged because one-off withdrawals are being treated as if they were regular payments into your pension. 

HMRC then generates a tax code – known simply as ‘Month 1’ – and applies deductions to the withdrawal as if they are going to be made on a monthly basis.  

The ‘Month 1’ code is applied as default by most pension providers, even when relevant documentation, such as a P45 from a former employer, is supplied.

What to do now

Savers must fill out 1 of the following forms to reclaim tax on their withdrawals, depending on whether they accessed cash from a defined benefit or defined contribution scheme.

From defined benefit schemes:

From defined contribution schemes:

  • P50Z – if you withdrew your pension pot and have no other income in the tax year
  • P53Z – if you withdrew your pension pot and have other sources of income in the tax year
  • P55 – if you didn’t withdraw your pension pot and are not receiving regular payments.

If you’ve flexibly accessed part or all of your pension pot since the rules on pension freedoms came into force in 2015, you may be eligible to reclaim an overpayment in tax.

To do this, you can either:

Contact us if you think this affects you.